COSTS IN MANAGEMENT ACCOUNTING

1. COST
- The monetary measure of the amount of resources given up or used for some purpose.
- The monetary value of goods and services expended to obtain current or future benefits.
2. SOME COST TERMS USED IN MANAGERIAL ACCOUNTING
- Cost object
a. Anything for which cost is computed.
b. Example: a product, product line, a segment of the organization
- Cost driver
a. Any variable, such as level of activity or volume that usually affects costs over a
period of time.
b. Example: production sales, number of hours
- Cost pool
a. A grouping of individual cost items, an account in which a variety of similar costs
are accumulated.
b. Example: work in process, factory overhead control
 COSTS IN MANAGEMENT ACCOUNTING

2. SOME COST TERMS USED IN MANAGERIAL ACCOUNTING

- Activity
a. An event, action, transaction, task, or unit of work with a specified purpose.
b. Value-Adding Activities – activities that are necessary (non-eliminable) to
produce the products
- Example: assembling the different component parts of the product.
c. Non-Value-Adding Activities – activities that do not make the product or
service more valuable to the customer.
- Example: moving materials and equipment parts from / to the
stockroom or a workstation.
 DIFFERENT COSTS FOR DIFFERENT PURPOSES

A. AS TO TYPE
1. Product Costs – costs incurred to manufacture the product
- Product costs of the units sold during the period ar recognized as
expense (cost of goods sold) in the income statement.
- Product costs of the unsold units become the costs of inventory
and treated as asset in the balance sheet.

2. Period Costs – The non-manufacturing costs that include selling,

administrative, and research and development costs. These costs are
expenses in the period of incurrence and do not become part of the
cost of inventory.
 DIFFERENT COSTS FOR DIFFERENT PURPOSES
B. AS TO FUNCTION
1. Manufacturing Costs – all the costs incurred in the factory to convert raw materials into
finished goods
a. Direct Manufacturing Costs – materials and labor
b. Indirect Manufacturing Costs – the manufacturing overhead or factory overhead costs
2. Non-Manufacturing Costs – all costs which are not incurred in transforming materials to finished
goods.
a. Research and Development – incurred in designing and bringing new products to the market
b. Marketing costs – advertising and promotion expenses
c. Distribution Costs – costs incurred in delivering the products to the customers
d. Selling Costs – salaries and commission of sales staff and other selling expenses
e. After-sales Costs – costs incurred in dealing with customers after sales. Examples are warranty,
repairs costs and costs incurred in receiving / entertaining / acting on customers’ complaints.
f. General and Administrative Costs – all the non-manufacturing costs that do not fall under
categories (a)
 DIFFERENT COSTS FOR DIFFERENT PURPOSES

C. AS TO TRACEABILITY / ASSIGNMENT TO COST OBJECT

1. Direct costs – costs that are related to a particular cost object and
can economically and effectively be traced to that cost object.

2. Indirect Costs – costs that are related to a cost object, but cannot
practically, economically, and effectively be traced to such cost object.
Cost assignment is done by allocating the indirect cost to the related
cost objects.
 DIFFERENT COSTS FOR DIFFERENT PURPOSES

D. FOR DECISION-MAKING
1. Relevant Costs - future costs that will differ under alternative courses of
action.
2. Differential Costs – difference in costs between any two alternative courses
of action
a. Incremental Cost – increase in cost from one alternative to another
b. Decremental Cost – decrease in cost from one alternative to another
3. Opportunity Costs – income or benefit given up when one alternative is
selected over another.
4. Sunk / Past or Historical Costs – already incurred and cannot be changed by
any decision made now or to be made in the future.
 DIFFERENT COSTS FOR DIFFERENT PURPOSES
E. AS TO BEHAVIOR (REACTION TO CHANGES IN COST DRIVER

1. Variable Cost – within the relevant range and time period under
consideration, the total amount varies directly to the change in
activity level or cost driver, and the per unit amount is constant.

VARIABLE COST (P)

ACTIVITY (units, hours, etc.)

(COST DRIVER)
 DIFFERENT COSTS FOR DIFFERENT PURPOSES

E. AS TO BEHAVIOR (REACTION TO CHANGES IN COST DRIVER

2. Fixed Cost – within the relevant range and time period under consideration,
the total amount remains unchanged, and the per-unit amount varies inversely
or indirectly with the change in the cost driver.

FIXED COST (P)

ACTIVITY (units, hours, etc.)

(COST DRIVER)
 DIFFERENT COSTS FOR DIFFERENT PURPOSES

a. Committed Fixed Costs – long term in nature and cannot be eliminated even
for short period of time without affecting the profitability or long-term goals of
the firm. Example: depreciation of buildings and equipment

b. Discretionary or( Managed Fixed Cost – usually arise from periodic (may be
annual, etc.) decisions by management to spend in certain fixed costs area such
as research, advertising, maintenance contracts. Discretionary fixed costs may
be change by management from period to period or even during (within) the
period, if circumstances demand such change. Examples: research and
development costs, advertising expense, maintenance costs provided by service
contractors.
 DIFFERENT COSTS FOR DIFFERENT PURPOSES
E. AS TO BEHAVIOR (REACTION TO CHANGES IN COST DRIVER

3. Step Cost – when activity changes, a step cost sifts upward or

downward by a certain interval or step.
.
Step Variable Costs – have small steps Step Fixed Costs – have large steps

COST (P) COST (P)

ACTIVITY (units, hours, etc.) ACTIVITY (units, hours, etc.)

 DIFFERENT COSTS FOR DIFFERENT PURPOSES

E. AS TO BEHAVIOR (REACTION TO CHANGES IN COST DRIVER

4. Mixed Cost – This cost has both a variable and a fixed component

MIXED COST (P)

ACTIVITY (units, hours, etc.)

(COST DRIVER)
 ANALYSIS OF MIXED COST

1. Mixed Cost or Total costs – have variable and fixed costs components
TC = FC + VC
Where: TC = Total Cost
FC = Total Fixed Cost
VC = Total Variable Cost
 ANALYSIS OF MIXED COST

2. Total variable cost varies directly with the activity level or cost driver
VC = bx
Where: VC = Total variable cost
b = variable cost per cost driver
x = cost driver
Example: If the cost driver is number of units and variable cost per unit
is P5, then VC = 5x
The total or mixed cost function may be expressed as:
TC = FC + bx
 RELEVANT RANGE
Relevant range is a range of activity that reflects the company’s normal
operating range. Within this relevant range, the aforementioned cost behaviour
is valid, i.e., :
Total Amount Per Cost Driver
Variable Cost Varies directly with cost driver Constant
Fixed Cost Constant Varies inversely with cost driver

Linearity Assumption – within the relevant range, there is a strict linear

relationship between the cost and cost driver. Costs may therefore be shown
graphically as straight lines.
 THE COST FUNCTION

Since total cost is linearly related to the activity level or cost driver, the
cost function (cost formula) may be expressed as:

Y = a + bx where: Y = Total cost

a = Total fixed cost
b = variable cost per cost driver
x = activity level or cost driver
SEPARATION OF THE FIXED AND VARIABLE COMPONENTS OF MIXED COST

1. High-Low Method
2. Scattergraph Method
3. Least Squares Regression Method
 HIGH – LOW METHOD

1. Mixed Cost – Fixed Cost + Variable Cost

2. Slope = Rise/Run = Y2 – Y1 = Change in Variable cost (Highest – Lowest)
X2 - X1 Change in Activity (Highest – Lowest)

3. Example: Highest Activity Level (March 2019) 850 units P4,675

Lowest Activity Level (Dec 2019) 300 units 2,925
4. Variable per unit = 4,675 – 2,925 = 1,750 = P3.18
850 - 300 = 550
5. Fixed Cost = Total Cost – Variable Cost
= 4,675 - 3.18 x 850 Cost Variable Cost
= 4,675 - 2,704
Fixed Cost = 1,971
Units
 LEAST SQUARE REGRESSION METHOD

1. Mixed Cost – Fixed Cost + Variable Cost

2. Slope (variable cost per unit) = n(Exy) – (Ex)(Ey)
n(Ex2) -(Ex)2
= 12 (1,195,600,000) – (35,400)(358,000)
12 ( 1,245,000,000) Total Hours (x) Total Costs (y)
= 6.9506 1. 3700 37,000
2. 1600 23,000
3. 4100 37,000
4. 4900 47,000
5. 3300 33,000
6. 4400 39,000
7. 3500 32,000
Cost Variable Cost 8. 4000 33,000
9. 1200 17,000
10. 1300 18,000
11. 1800 22,000
Units 12. 1600 20,000
 SEPARATION OF THE FIXED AND VARIABLE COMPONENTS OF MIXED COST

1. Multiple Regression Analysis

This is used when the dependent variable (cost, for example) is caused by more
than one factor. In other words, the dependent variable (cost) is related to more
than one independent variable (units, machine hours, etc.)
2. Correlation Analysis
Correlation – measure of the co-variation between the dependent and
independent variables
- If all plotted points fall on the regression line, there is perfect correlation
- If correlation between the cost and cost driver is high and the past relationship
between such variables will continue in the future, then the cost driver chosen
will be useful for predicting future levels of the costs being analysed.
 COEFFICIENT OF CORRELATION

1. Coefficient of Correlation (denoted by r) – measure of the extent

of the linear relationship between two variables
2. Range of values of r: from -1 to 1
r = -1 < 0 < a
When r = 0, there is no correlation

Y . . .
. . . . . .
. . .
x
 COEFFICIENT OF CORRELATION

When r is positive, there is a positive or direct relationship between

the dependent (y) and independent (x) variables. That is, the value of
y increases when the value of x increases. The regression line slopes
upward to the right.

Y . .
. . .
.
x
 COEFFICIENT OF CORRELATION

When r is negative, there is a negative or inverse, or indirect

relationship between the variables. The value of y decreases as the
value of x increases. The regression line slopes downward to the
right.

Y
. . .
. ‘ .

x
 COEFFICIENT OF DETERMINATION

1. Coefficient of determination (denoted by r2) is computed by

squaring the value of r. it represents the percentage of the
total variation in the dependent variable y that is explained or
accounted for by the regression equation.
2. A very high r2 means that the values in the regression
equation explain virtually the entire amount of the total cost.
The variables are highly correlated. i.e., the cost driver selected
is highly related to the dependent costl
 STANDARD ERROR OF THE ESTIMATE

1. Standard error of the estimate – the standard deviation about the regression
line
2. Estimated values computed using the regression equation may differ from the
actual costs. The differences are called prediction errors or errors of estimate.
3. The standard error of estimate is calculated to serve as a confidence interval or
acceptable range of tolerance, for use in exercising control over the costs. By
comparing a cost variance with the standard error of estimate, management
can decide whether to investigate such variance or not.
• If r2 = 1, the standard error = 0
• A small value of the standard error indicates a good fit.
 MULTIPLE CHOICE

1. Cost is the monetary measure of the amount of resources given up in

obtaining goods and services. Costs may be classified as unexpired or
expired.
Which of the following costs is not always considered to be expired
immediately upon being recognized?
a. salesmen’s commission
b. Depreciation expense for factory equipment
c. Cost of goods sold
d. Salary of the company president

2. An activity that causes resources to be consummated is called a

a.non-value added activity c. just-in-time activity
b.Cost driver d. extracurricular activity
 MULTIPLE CHOICE

3. It refers to anything (a product, product line, a business segment) for which

cost is computed.
a. Cost object c. Cost control
b. Cost driver d. Cost variance

4. It is grouping of individual cost items, or an account in which a variety of

similar costs are accumulated.
a. Cost driver c. Income statement
b. Cost variance d. Cost pool

5. It is an event, action, transaction, task, or unit of work that consumes

resources and with a specified purpose.
a. Cost object c. Cost driver
b. Activity d. Direct labor
 MULTIPLE CHOICE

6. An activity that adds costs to the product or service, but does not make such
product or service more valuable to customers is called
a.non-value added activity c. costly activity
b.Value-adding activity d. valuable activity

7. Which of the following statements is correct?

a. A cost driver is an accounting technique used to control costs.
b. A cost driver is a measure of activity, such as direct labor hours, machine
hours, beds occupied, computer time, etc., that is a causal factor in the
incurrence of costs.
c. A cost driver is an accounting measurement used to evaluate whether or
not performance is proceeding according to plan.
d. A cost driver is a mechanical basis used to assign costs to activities
 MULTIPLE CHOICE

8. Product costs or inventoriable costs

a. Are charges to expense when products become part of the finished goods
inventory
b. Include only the prime costs of producing a product.
c. Are treated as assets before the products are sold
d. Include only the conversion costs of producing the products.

9. Which of the following costs is not a product cost?

a. Wages paid to workers for rework on defective products.
b. Wages paid to truck loaders who load finished goods onto outgoing delivery
trucks
c. Fringe benefits paid to factory workers.
d. Wages paid to workers for idle time due to machine breakdown in a production
department.
 MULTIPLE CHOICE

10. Product costs

a. Are always expensed in the same period in which they are incurred.
b. Are inventoriable costs
c. Vary directly with changes in the cost driver.
d. Are always charged to an asset account in the same period in which they are
incurred.
 MULTIPLE CHOICE
Items 11 and 12 are based on the following information:
Following are costs incurred by Abtina Manufacturing Corporation during the
previous month:
Direct materials P 5,000
Indirect materials 2,000
Direct labor 6,000
Indirect labor 1,000
Factory utilities 4,000
Advertising costs 8,000
Sales commissions 12,000
Depreciation on administrative building 3,000
Salaries of administrative personnel 20,000
Depreciation – delivery equipment 2,000
Overtime pay – factory workers 1,500
Rework cost on defective products discovered
during quality inspection 2,500
 MULTIPLE CHOICE

11. Total product costs:

a. P67,000 c. P22,000
b. P45,000 d. P18,000

12. Total period costs:

a. P67,000 c. P49,000
b. P45,000 d. P22,000

13. Manufacturing costs do not include:

a. Prime costs c. indirect materials
b. Conversion costs d. salary of the president, under whom
is the vice president for production
 MULTIPLE CHOICE

13. Manufacturing costs do not include:

a. Prime costs
b. Conversion costs
c. Indirect materials
d. Salary of the company president, under whom is the vice president for
production

14. Direct labor is a

a. Prime cost c. product cost
b. Conversion cost d. all of the above
 MULTIPLE CHOICE
Items 15 and 21 are based on the following information:
Data about Anabelle Company’s production and inventories for the month of June
are as follows:
Purchases – Direct Materials P143,440
Freight-in 5,000
Purchases returns and allowances 2,440
Direct Labor 175,000
Actual Factory Overhead 120,000

Inventories June 1 June 30

Finished goods P68,000 P56,000
Work in process 110,000 135,000
Direct Materials 52,000 44,000
Annabelle Company applies factory overhead to production at 80% of direct
labor cost. Over or under applied overhead is closed to cost of goods sold at
year-end. The company’s accounting period is on the calendar year basis.
 MULTIPLE CHOICE

15. Anabelle Company’s prime cost for June was

a. P154,000 c. P198,000
b. P329,000 d. P315,000

16. Anabelle Company’s conversion cost for June was

a. P315,000 c. P329,000
b. P295,000 d. P444,000

17. For the month of June , Anabelle Company’s total manufacturing cost was
a. P469,000 c. P644,000
b. P444,000 d. P449,000
 MULTIPLE CHOICE

18. For June, Annabelle Company’s cost of goods transferred to the finished
goods inventory account was:
a. P579,000 c. P469,000
b. P461,000 d. P444,000

19. Annabelle Company’s cost of goods sold for June was

a. P67,000 c. P49,000
b. P45,000 d. P22,000

20. Manufacturing costs do not include:

a. P441,000 c. P456,000
b. P481,000 d. P444,000
 MULTIPLE CHOICE

21. The cost of goods sold for the month of June should be increased
(decreased) by the amount of over/under-applied factory overhead of
a. P20,000 c.( P120,000)
b. ( P20,000) d. P0

22. For product costing purposes, an indirect factory cost:

a. Is not directly chargeable to the company.
b. Is chargeable to prime costs.
c. Is chargeable to conversion costs.
d. Is never included in the computation of product cost.
 MULTIPLE CHOICE
23. A fixed cost that would be considered a direct cost is
a. Salary of the sales manager when the cost object is the sales department
b. Salary of the controller when the cost object is a unit of product
c. Fees of the Board of Directors when the cost object is the Production
Department
d. The rental cost of the finished goods warehouse when the cost object is the
Accounting Department

24. Indirect materials and indirect labor are

Prime Cost Conversion Cost Manufacturing Cost
a. Yes Yes Yes
b. No No Yes
c. No Yes Yes
d. Yes No No
 MULTIPLE CHOICE
25. Which of the following is a direct product cost?
a. Wood in a furniture factory
b. Salary of the foreman in the assembly division of an automobile company
c. Depreciation of factory equipment
d. Salesman’s commission

26. The variable portion of the semi-variable cost of electricity for a manufacturing
plant is a
Product Cost Prime Cost Conversion Cost
a. No No Yes
b. Yes Yes No
c. Yes Yes Yes
d. Yes No Yes
 MULTIPLE CHOICE
27. The salaries of the factory janitorial and maintenance staff should be classified as
a. Direct labor cost c. Prime cost
b. Period cost d Factory . overhead cost.

28. For decision-making purposes, relevant costs area.

a. Variable past costs
b. All fixed and variable costs
c. Anticipated future costs that will differ among various alternatives
d. Costs incurred within the relevant range of production
 MULTIPLE CHOICE
29. Differential costs
a. Are variable costs
b. Are anticipated future costs that will differ among various alternatives
c. Are the differences in costs between any two alternative courses of action
d. Are costs that differ under alternatives

30. An income or benefit that is given up when one alternative is selected over
another is called .
a. loss
b. Opportunity cost
c. Relevant cost
d. Differential cost
 MULTIPLE CHOICE

31. Sunk costs

a. Relevant costs
b. Can be changed by a decision made now or to be made in the future
c. Are irrelevant for decision-making purposes
d. Are decreases in costs from one alternative to another

32. Which of the following costs would be considered relevant in short-term

decision-making
a. Production costs of goods available for sale
b. Incremental fixed costs
c. Acquisition cost of idle asset to be used in a proposed project.
d. Variable costs
 MULTIPLE CHOICE
33. Which of the following statements about cost behaviour is correct?
a. Within the relevant range, total variable costs may vary directly with activity,
while total fixed costs remain unchanged for a given period despite fluctuations
in activity.
b. Within the relevant range, variable cost per unit varies directly with activity, while
fixed cost per unit remains unchanged for a given period despite fluctuations in
activity.
c. Within the relevant range, fixed cost per unit varies directly with
activity, while variable cost per unit remains unchanged for a given
period despite fluctuations in activity
d. Within the relevant range, total variable costs may vary inversely with
activity, while total fixed costs remain unchanged for a given period
despite fluctuations in activity.
 MULTIPLE CHOICE

34. In cost accounting, the term relevant range refers to the range over which
a. Relevant costs are incurred
b. Production should be confined..
c. Total fixed costs fluctuate
d. Cost relationships are valid

35. Depreciation computed using the straight-line method is classified as

a. Variable cost c. relevant cost
b. Fixed cost d. opportunity cost
 MULTIPLE CHOICE
36. Within the relevant range, unit variable costs
a. Are constant per unit regardless of units produced or sold.
b. Vary directly with the activity level
c. Vary inversely with the activity level
d. Are at the minimum

37. When production (in units) decreases, the average cost per unit of product
increases. The increase in the average costs per unit is due to the
a. Increase invariable cost per unit
b. Increase in fixed cost per unit
c. Increase in total variable costs.
d. Increase in total fixed costs
 MULTIPLE CHOICE
38. Consider Line AB in each of the following graphs
Graph 1 Graph 2 Graph 3
Cost Cost Cost

Units Units Units

Line AB is the
Graph 1 Graph 2 Graph 3
a. Total sales line fixed cost per unit line total variable cost line
b. Variable cost per unit line total variable cost line total fixed cost line
c. Total variable cost line total fixed cost line total cost line
d. Break-even line parallel line total sales line
 MULTIPLE CHOICE
45. The following data were collected from the records of the Receiving Department of
a company:
Number of Receiving and
Month Items Received Handling Costs
January 2,800 17,500
February 2,000 12,500
March 1,190 7,450
April 5,200 32,500
May 4,410 27,600
June 4,016 25,500
The receiving and handling cost is most likely to be a
a. Step cost c. fixed cost.
b. Variable cost d. semi-variable cost
 MULTIPLE CHOICE
Items 46 to 48 are based on the following information:
Charity Company wants to analyse the behaviour of its selling costs for budgeting purposes.
Cost drivers (actively measures) and costs incurred in the first quarter and the first month of
the second quarter are as follows:
Selling Costs January February March April
Sales salaries P42,500 P42,500 P42,500 P51,000
Commissions 15,000 17,500 14,000 16,000
Shipping costs 34,000 38,000 32,400 35,600
Advertising 20,000 20,000 25,000 20,000
Cost drivers
Peso sales P330,000 P350,000 P280,000 P320,000
Sales in units 30,000 35,000 28,000 32,000
Sales orders 150 175 140 160
The sales staff are paid monthly salaries plus commissions. Advertising expenses are charged
subject to the discretion of management. The increase in sales salaries in April is due to
the increase in the sales staff, from five to six persons.
 MULTIPLE CHOICE

46. In relation to the appropriate cost drivers, how should the company’s selling costs be
classified?
Sales salaries Commissions Shipping costs Advertising
a. Variable Variable Variable Variable
b. Fixed Variable Variable Fixed
c. Fixed Variable Mixed Fixed
d. Mixed Variable Mixed Fixed

47. Using the high-low method and the algebraic equation y=a+bx (where y equals total
shipping costs a equals total fixed costs; b equals variable shipping cost per unit; and x is
the number of units sold), the cost formula for the shipping costs may be expressed as
a. Y = 10,000 + 0.80 x c. y = 10,000 + 0.80
b. Y = 0.80 + 10,000 x d. y= 10,000 + 5,600
 MULTIPLE CHOICE

48. If the company plans to sell 36,000 units in May and fixed costs will
remain at the April level, the total selling costs for May would be:
a. P122,600 c. P127,800
b. P125,800 d. P81,000
 MULTIPLE CHOICE
Items 49 to 54 are based on the following information:
Maco Corporation’s Research and Development Department was able to develop a new product – a
flashlight powered by solar energy. After reviewing the data prepared by the company’s controller, Maco’s
management is confident that the new product will contribute profit to the company.
The data prepared by the controller are as follows:
Suggested selling price P200
Costs: Materials P60
Parts fabrication (P10 per hour) 40
Assembly (P6 per hour) 18
Variable overhead (P4 per hour) 28
Fixed overhead (P3 per hour) 21
Total cost P167
The total research and development costs incurred to develop the new product amounted to P200,000.
The company is planning to spend half of this amount for promotion and advertising. The company’s fixed
overhead includes rent, equipment depreciation, and salaries of factory supervisors.
 MULTIPLE CHOICE

49. For Maco’s new flashlight, total prime costs amount to:
a. P118 c. P146
b. P167 d. P107

50. The difference between the flashlight’s suggested selling price of P200
and the total cost of P167 represents each flashlight’s
a. Gross profit c. Net profit
b. Contribution margin d. Operating income

51. The total overhead cost of P49 per unit is a :

a. Prime cost c. Mixed cost
b. Variable cost d. Fixed cost
 MULTIPLE CHOICE

52. The total research and development costs of P200,000 incurred to

develop the new product is a
a. Relevant cost c. Avoidable cost
b. Sunk cost d. Postponable cost

53. The costs included in Maco’s fixed overhead are

a. Prime costs c. Committed costs
b. Discretionary costs d. Variable costs

54. The plan spending on promotion and advertising for the flashlight is a
a. Variable cost c. Sunk cost
b. Discretionary cost d. Past cost
 MULTIPLE CHOICE

55. The least exact method for separating the variable and fixed cost
components of a mixed cost is
a. Matrix algebra c. the least squares method
b. The high-low method d. computer simulation
 MULTIPLE CHOICE

Items to 56 to 58 are based on the following information:

Meng Company is preparing a flexible budget for next year and requires a
breakdown of the factory maintenance cost into the fixed and variable
elements.
The maintenance costs and machine hours (the selected cost driver) for the
past six months are as follow:
Maintenance Costs Machine Hours
January P15,500 1,800
February 10,720 1,230
March 15,100 1,740
April 15,840 2,190
May 14,800 1,602
June 10,600 1,590
 MULTIPLE CHOICE

56. If Meng Company uses the high-low method of analysis, the estimated
variable rate of maintenance cost per machine hour is
a. P7.23 c. P5.46
b. P8.73 d. P5.33

57. The average annual fixed maintenance cost amounts to:

a. P4,160 c. P49,920
b. P8,320 d. P5,120

58. What is the average rate per hour at a level of 1,500 machine hours?
a. P5.33 c. P7.23
b. P8.11 d. P5.46
 MULTIPLE CHOICE

59. The manager of the mixing department of Ali Van Company wants to
determine the fixed variable components of the department’s costs. He
collected information on total cost and the number of kilos mixed for the past
12 months. He wants more accurate results so he is planning to use a
sophisticated method for cost separation. The manager should use:
a. High-Low method c. Game theory
b. Regression analysis d. Queuing theory

60. The usual formula for the regression (least squares) equation is y=a+bx+e.
Considering such equation which of the following incorrect?
a. The dependent variable is x, while he independent variable is y
b. The y-axis intercept is a
c. The slope of the line is b
d. The error term is e
 MULTIPLE CHOICE

Items 62 to 64 are based on the following information:

Frances Corporation conducted a regression analysis of its factory overhead costs. The
analysis yielded the following cost relationship:
Total factory overhead cost = P50,000 per month + 5H*
* H = number of direct labor hours, the selected cost driver for overhead costs.
Each unit of product requires 6 direct labor hours. The company’s normal production is
20,000 units of product per year.

62. The total overhead cost for a month’s production of 2,000 units is
a. P60,000 c. P110,000
b. P50,000 d. P0
 MULTIPLE CHOICE

63. The predetermined cost for a month’s production of 2,000 units is

a. P6.00 c. P2.50
b. P5.00 d. P0.42

64. The total predetermined factory overhead rate per hour is

a. P5.00 c. P10.00
b. P7.50 d. P35.00
 MULTIPLE CHOICE

Items 65 to 68 are based on the following information:

The management of a hotel is interested in the relationship between room cleaning costs
and guest –days in its hotel. Using regression analysis on room leaning costs and guest-
days collected over 12 months, the relationship was shown graphically as follows:
60,000
Room 50,000
Cleaning 40,000
Costs 30,000
20,000
10,000
500 1000 1500 2000 2500
Guest-days
 MULTIPLE CHOICE

65. The estimated monthly fixed room cleaning cost is

a. P25,000 c. P10,000
b. P30,000 d. P0

66. The estimated increase in the room cleaning cost for each
additional guest-day is:
a. P26.67 c. P60,000
b. P10.00 d. P25,000
 MULTIPLE CHOICE

67. The cost formula for the room cleaning costs may be expressed as
a. Cost = P25,000 + guest-days
b. Cost = P25,000
c. Cost = P25000 + P10
d. Cost = P25,000 + P10 (guest-days)

68. If the relevant range is from 0 to 2,000 guest-days, how much is the total
room cleaning cost for 2200 guest-days?
a. P47,000
b. P22,000
c. P25,000
d. Cannot be determined from the given information
 MULTIPLE CHOICE
Items 69 to 74 are based on the following information:
Belle Company produces and sells rattan baskets. The number of units produced and the
corresponding total production costs for six months, which are representatives for the
year, are as follows:
Month Units Produced Production Costs
April 500 P4,000
May 700 8,000
June 900 6,000
July 600 7,500
August 800 8,500
September 550 7,250
 MULTIPLE CHOICE

Based on the given information and using the least squares method of
computation , Select the best answer for each question, = where:
y = total monthly production costs
x = number of units produced per month
a = fixed production cost per month
b = variable production cost per unit
n = number of months
E = summation
 MULTIPLE CHOICE

69. If the least squares method is to be used to segregate the variable and
fixed cost components of the total production cost, the equation(s) required
to express the relationship between fixed and variable costs are
a. Ey = na + bEx and Exy = aEx + bEx2
b. Exy = aEx + bEx2
c. Ey = na + bEx
d. Y = a +bEx2 and Ey = na + bEx

70. The cost function derived by the simple least squares method
a. Is linear
b. Is curvilinear
c. Is parabolic
d. Must be tested for minimum and maximum points.
 MULTIPLE CHOICE

71. The monthly production costs can be expressed as

a. Y = a + b x c. y = ax + b
b. Y = b + ax d. x = a + by

72. Using the least squares method, the variable production cost
per unit is approximately.
a. P 5 c. P0.27
b. P10 d. P3.74
 MULTIPLE CHOICE

73. Using the least squares method, the monthly fixed production cost is
approximately
a. P 1,500 c. P 4,350
b. P 18,000 d. P 5,2200

74. If the high-low points method is used, the results when compared with
those under the method of least squares, are
Variable Cost per Unit Total Fixed Costs
a. Equal Equal
b. Higher by P1.26 Lower by P2,850
c. Lower by P 1.26 Higher by P2,850
d. Higher by P5 Lower by P1,500
 MULTIPLE CHOICE

Items 75 to 77 are based on the following information:

The cost accountant of Ginatemple Corporation has compiled the actual costs
for six different levels of activity. The data are shown in he able and graph
below:
Observation Units Produced Actual costs
A 40 P100,000
B 80 100,000
C 120 300,000
D 160 400,000
E 200 500,000
F 200 600,00
 MULTIPLE CHOICE
1,000
Actual 900
Costs 800
In 700
000’s 600 o F
500 o F
400 o D
300 o C
200
100 oA oB
0
0 40 80 120 160 200 240
Units Produced
 MULTIPLE CHOICE
Items 78 to 82 are based on the following information:
As part of a cost study, the cost accountant of Shinly Corporation has recorded the
cost of operations at seven different levels of materials usage. The records show the
following:
Kilos of Materials Costs of Operation
80 P800
60 480
20 320
120 1,200
140 1,280
40 480
100 1,040
Sum of the kilos (Ex) 560
Sum of the costs (Ey) P5,600
Sum of the kilos multiplied by the cost (Exy) P545,600
Sum of the kilos squared (Ex2) 56,000
 MULTIPLE CHOICE

78. Using the high-low points method, the variable cost of operations per kilo
of materials used is
a. P8.00 c. P16
b. P9.14 d. P10

79. Using the same high-low points method, the fixed cost of operations is
a. P320 c. P160
b. P103 d. P206

80. Using the least squares method, the average rate of variability per kilo of
materials used is
a. P8.80 c. P10.00
b. P0.11 d. P8.71
 MULTIPLE CHOICE

81. Using the least squares method, the fixed portion of the cost is
a. P320 c. P160
b. P103 d. P206

82. The projected cost of operations for 90 kilos of materials is

a. P886.90 if the high-low points method is used.
b. P880.00 if the method of least squares is used.
c. P886.90 if the method of least squares is used.
d. P880.00 regardless of the method used.
 MULTIPLE CHOICE

83. The cost accountant of Trisha Company conducted an analysis of total cost in
relation to the number of labor hours used and came up with a cost function for a
relevant range of 50,000 labor hours to 400,000 labor hours as follows:
Total cost = P400,000 x 20x *
* x = number of direct labor hours
How much is the total cost for 40,000 direct labor hours
a. P1,200,000 c. P400,000
b. P800,000 d. Cannot be determined from the given information

84. It is the measure of the co-variation between the dependent and independent
variables.
a. Correlation c. Standard error
b. Ratio d. Variance
 MULTIPLE CHOICE

85.Correlation is a term frequently used in conjunction with regression

analysis and is measured by the value of the coefficient of correlation r. The
value of r
a. Is always positive
b. Is always negative
c. Is a measure of the relative relationship between two variables
d. Ranges in size from negative one to zero

86. The coefficient of correlation that indicates the strongest linear

association between the dependent and independent variables is
a. -0.08 c. -0.80
b. 0.40 d. 0.04
 MULTIPLE CHOICE

87. What coefficient of correlation results from the following data?

X Y
2 4
4 8
6 12
8 16
10 20

a. -1 c. 0
b. +1 d. cannot be determined from the given data
 MULTIPLE CHOICE
88. A scatter diagram is a tool which may be used to demonstrate
correlations. The scatter diagram’s objective is to
a. Show frequency distribution in graphic form
b. Display a population of items for analysis
c. Indicate the critical path
d. Divide a universe of data into homogenous groups

89. If the coefficient of correlation between two variables is -0.95, how might
a scatter diagram of these variables appear?
a. A least squares line that slopes up to the right.
b. A least squares line that slopes down to the right
c. Random points
d. A least squares line that slopes down to the left
 MULTIPLE CHOICE
90. Using regression analysis, Melody, the accountant of Lacuata Company
graphed the following relationship of its most expensive product line’s sales
with its customers income levels:

Sales

Income levels

If there is a strong statistical relationship between the sales and customers’

income levels which of the following best represents the correlation
coefficient for this relationship?
a. 0 c. +0.96
b. -0.96 d. +9.6
 MULTIPLE CHOICE
91. In regression analysis, the coefficient of determination is a measure of
a. The estimated value of he dependent variable.
b. The slope of the line of regression.
c. The amount of variation in the dependent variable that cannot be explained by the
independent variable
d. The amount of variation in the dependent variable that can be explained by the
independent variable.
92. Verfemin Company uses regression analysis to develop a cost formula for predicting production
costs. The company’s accountant is considering two different cost drivers (units produced and
direct labor hours) as the independent variable (x). The analysis showed the following results:
Independent Variable Y-intercept Slope (b) r r2
Units produced P30,000 12 0.85 0.72
Direct labor hours 50,000 8 0.95 0.90
Which cost formula should be used?
a. Cost = 30,000 +12x c. Cost = 30,000 + 0.85x
b. Cost = 50,000 + 8x d. Cost = 50,000 + 7.60x
 MULTIPLE CHOICE
93. Consider the following graph:
Factor
Overhead .
Cost 3 . .
2 . .
1 .
1 2 3 4 5
Direct Labor Hours
If regression analysis is applied to the data on the graph, the coefficients of
correlation (r) and determination (r2) will indicate the existence of a
a. High direct linear relationship, high explained variation ratio
b. Low direct linear relationship, low explained variation ratio
c. High inverse linear relationship, high explained variation ratio
d. Low inverse linear relationship, low explained variation ratio
 MULTIPLE CHOICE
94. Odessa, the auditor of Sta. Maria Appliance Center has developed a
multiple regression model that has been used for a number of years to
estimate the amount of instalment sales from credit applicants’ income
levels. During the current year, Odessa applied the model and discovered that
the r2 value deceased dramatically, although the model seems to be working
well. Which conclusion is justified by the change?
a. Regression analysis is no longer an appropriate technique to estimate
installment sale.
b. Some new factors, not included in the model, are causing installment
sales to change.
c. The model is no longer reliable.
d. The decrease in the value of r2 should not be considered in the model.
 MULTIPLE CHOICE

95. Which of the following statements is correct?

a. The accounting system is part of cost accounting that measures costs for
decision-making and financial reporting purposes
b. Cost accumulation involves collecting costs by natural classification,
such as materials or labor.
c. Cost allocation or cost assignment involves tracing and assigning costs to
cost drivers, such as direct labor hours or number of units
d. Cost and managerial accounting are goods in the economic sense and, as
such, their costs must exceed their benefits
 MULTIPLE CHOICE
96. Within the accounting system, cost accounting
a. Is a combination of managerial accounting and financial accounting
since its purpose can be to provide internal reports for use in
management planning, control and decision-making and because its
product costing function satisfies external reporting requirements.
b. Is concerned only with internal reporting that aids management in
decision-making
c. Can best be defined as external reporting to government, stockholders,
and other interested parties.
d. Is a combination of managerial accounting and responsibility accounting.